Treasurer Says Investment Firms Overcharging Local Pensions By $50 Million

City Treasurer Kurt Summers said the city’s smallest pension funds are being overcharged for investments. DNAinfo Chicago | Sam Cholke

DNAINFO CHICAGO / Sam Cholke

DOWNTOWN — Wall Street will squeeze $1 billion in fees out of Chicago’s pension funds over the next 40 years if something isn’t changed, according to new city Treasurer Kurt Summers.

Since taking office in December, Summers claims he’s discovered that investment managers are wringing upward of $50 million a year in extra fees out of the city and Cook County’s 10 employee pension funds by charging substantially higher fees to the smaller pension funds for the exact same investments.

“I don’t begrudge any firm from making as much money as it can, that’s what they’re in the business to do,” Summers said in an interview last week. “It’s our fault for operating in silos and not looking at this sooner.”

Summers said when he came into office he found that just 23 firms are raking in half of the $142 million in fees the pension funds pay out to manage $35 billion in funds.

“Let’s go have 23 conversations,” Summers said. “Let’s start with the firms who have gotten plenty of their fair share.”

In October Mayor Rahm Emanuel tapped Summers to replace Stephanie Neely, making him the second consecutive city treasurer from Kenwood. The timing was seen by many as a move to curb potential electoral challenges to Summers.

Whether intentional or not, Summers will be the only candidate on the ballot for treasurer in the February election, leaving him plenty of time to pour over the city’s ledgers.

Summers’ plan is to aggregate pricing, similar to New York City’s system, and convince investment managers to offer the lowest fee to all the pension funds, not just the largest ones.

He said he’s already spoken with four firms and gotten a commitment from one to lower fees by a third.

Summers, who sits on the board of four of Chicago’s pension funds, said the plan requires no change to any laws or the structure of the governing bodies, and he’s optimistic he can make the promised changes in a year, well before any challengers decide to run against him in 2019.

“Hopefully I’ll be able to say we saved $1 billion,” Summers said.

Financial experts given the outline of Summers’ plan said the math adds up as long as the savings are reinvested.

“Not paying higher fees leaves more money to grow and is usually one of the most critical lessons we teach finance students: Never overpay because it never ‘evens out’ over time,” said Dale Rosenthal, a finance professor at the University of Illinois at Chicago.

Rosenthal said to really dig into Summers’ plan he would need more information about the pension systems’ fees.

Summers said it was difficult information even for his office to collect and he was surprised to find that he couldn’t easily find out how much of the city’s pension money is being invested locally.

“You would think that information would be readily available,” Summers said.

He said he’s currently looking into how to divert some of the pension investments into high-rated securities in Chicago and impress on investment managers that they need to look for Chicago investments if they want to continue managing the city employees’ money.